Betting the Farm on Farms

Over the last 40 years, U.S farmland has in aggregate delivered very good returns with low volatility, when compared with stocks and bonds. The correlation of returns is also low, meaning that the addition of farmland to a portfolio can provide diversification benefits. Is there a way for investors to capture these benefits?

Investing in Farmland

For a long time, the only way to get exposure to farmland was to buy a farm (or farms). That can be cost-prohibitive, especially if one wants multiple locations in order to diversify the type of crops grown or protect against disappointment from any one area in a given year. A farm buyer also faces the complications of finding someone to farm the land, negotiating agreements, pay taxes and insurance, etc. It can be a full-time job even if you are not doing the actual farming.

Institutional investors have long had the option of investing in farmland via private equity type structures. This involves pooling money from investors, buying a portfolio of farmland, and managing it. The fee structures have historically followed the hedge fund model, with a standard management fee plus an incentive fee. This investment structure is becoming more widely available to individual investors at lower fees, though typically only for higher net worth individuals (those categorized as accredited investors or qualified purchasers). While much lower than for buying a farm outright, investment minimums can still be high. Liquidity for these products is usually limited, given the illiquid nature of farmland itself. Individuals should also note that if they purchase these funds in IRA accounts, they will likely owe taxes on the investment income due to Unrelated Business Taxable Income (UBTI) rules.

There are a couple of REITs (Real Estate Investment Trusts) that invest in farmland. They offer daily liquidity to investors and are open to anyone with an investment account. However, since they are traded securities, so far they have exhibited a lot more volatility than direct investments in traditional farmland. In fact, over the 5 years that they have been in existence both REITs (LAND & FPI) have had lower returns and higher volatility versus the S&P 500.

FinTech, also known as Financial Technology, is continuing to make new avenues of investment available to more people through the use of software and modern technology. There are at least two firms specializing in farmland investing, but their track records are still very short.

Summary

While it is possible for individuals to invest in farmland, each of the options for doing so has pros and cons. It is certainly not an investment that should be entered into lightly. Know what you are getting into and know the process for getting out. Working with a trusted advisor can help navigate the complexities of farmland investing.

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